Auto Logistics: Revving Up Service Parts Logistics Operations

To boost efficiency and pave the road for global service parts logistics management, Ford is steering a 10-year plan to revamp its service parts network, processes, and technologies. Here is a peek under the hood of Ford's new “best-in-class plus” operation.

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To say that Ford Motor Company’s service parts supply chain is complex may be the understatement of the millennium. As one of the world’s largest automakers, Ford boasts $118 billion in revenue and nearly 200,000 employees worldwide. Its U.S. service parts operation alone encompasses some 250,000 part numbers (which equates to about 1.5 million SKUs), approximately 1,500 suppliers, and 4,000 dealerships.

The service parts network serves a wide variety of customers— from tiny dealers in small towns to large wholesalers. It also includes a vast array of parts that differ in size, demand volume, and seasonality: from small parts such as spark plugs to large parts such as sheet metal, high-volume parts including filters, and slow-moving parts such as interior trim.

High service levels are crucial. If a U.S. dealer orders a fast-moving part from Ford by 4 p.m., the company targets delivery by 10 a.m. the next day for 98 percent of its shipments. It promises second-day service for bulk parts, and maintains high service-level commitments on parts for aging vehicles. In addition, Ford faces the same critical challenge that befalls every service parts organization: balancing between providing superior service levels to customers and minimizing procurement, logistics, and inventory expenses.

The company must also meet the service parts challenges associated with an increasing number of new vehicle launches. Ensuring replacement parts are available to dealers before a new model hits the market presents an obvious forecasting challenge. “We have to make an educated guess about where to put repair parts and how many to have,” explains Ford Supply Chain Manager Michael J. Czach. “If that guess is wrong, it can be expensive. On the flip side, it is painful to a customer who gets into an accident if we don’t have a tail light available.”

So how does Ford tackle this complex beast of a supply chain? By carefully optimizing the technology, processes, and warehouse network design it uses to manage service parts logistics. Over the past 10 years, the automotive giant has undergone massive changes in these three areas to craft a service parts supply chain that is lean, fast, efficient, cost-effective, and, most importantly, lays the foundation for the firm’s global supply chain vision.

strategic planning

Before its restructuring, Ford utilized a fairly traditional warehouse network model for its service parts supply chain. One hub served eight facing depots spread across the country that delivered parts to area dealers. The hub sent parts to the depots based on a “pull” strategy— when a specific facility was at risk of dropping below safety stock levels on a certain part, the hub depot pulled the inventory and sent a shipment.

As a result of this strategy, Ford’s eight facilities were performing a whopping 12,000 warehouse transfers daily, eating up valuable time and labor resources. Today, the company’s service parts warehouse network looks vastly different.

After a lengthy optimization project, Ford now operates 26 smaller warehouses strategically located throughout the nation, allowing the company to be closer to its customers.

“We started by asking dealerships how frequently they needed deliveries,” Czach explains. “Then we considered scenarios such as whether they need to be able to request an emergency order in the middle of the night and receive it first thing in the morning. We then built our physical network to be able to meet those various needs.”

Another part of Ford’s network optimization strategy was to segregate different part types by volume, size, and frequency of use. It now operates 19 high-velocity centers that handle smaller, fast-moving parts for next-day delivery; and three buildings (located in Sacramento, Calif.; Memphis, and Detroit) dedicated to bulk parts for second-day delivery.

“We also maintain a facility in Michigan where we stock and manage slow-moving parts,” adds Carrie Thompson, Ford’s global program manager for service parts.

In addition, the company switched to a push deployment strategy for the majority of its volume.

“When we decided to increase our number of depots, we knew we’d have too many warehouse transfers with a pull strategy, so we had to switch to push deployment,” Czach explains. “With push, the trigger is a receipt. Our enterprise resource planning (ERP) system creates a release to the supplier, the supplier ships the material in, and we push that material out across our network where it is needed, instead of putting parts away on the shelf and waiting for our buildings to hit a low stock point.”

The company worried that switching to this higher-velocity push strategy would bog down the depots with a glut of inbound shipments, but those fears were allayed.

“We believed that as we increased velocity, inbound productivity would drop like a rock, but we found that is not true,” Czach says.

This is partly because Ford shrunk its order sizes, shipping smaller quantities more frequently. As a result, the warehouse now generally receives only the two parts it needs, instead of getting five parts and putting three in reserve and two in a forward-pick location.

“We now operate a high-velocity network,” Czach says. “We manage lead times tightly and push-deploy the majority of our material. As a result, we improved service commitments.”

Technology Leads the Way

Though the changes Ford made to its physical network and service parts strategies were extensive, the pivotal element of its service parts supply chain revamp is its new cutting-edge technology system: SAP’s Service Parts Management (SPM) solution, which Ford helped develop, and has been implementing in phases since 2007. The ongoing project, which began in 2001, is one of the largest IT projects in Ford’s nearly 100-year history.

Although Ford’s legacy technology system for service parts management, which some Ford facilities still use, was already considered best in class, it was an aging system that had become increasingly difficult and expensive for the company to maintain. The solution also included some deficiencies that were clouding Ford’s vision of an end-to-end global supply chain.

The legacy system isn’t set up to handle the multiple currencies that are a part of global commerce, explains Thompson, who joined Ford’s SAP project team in 2004 and is now responsible for the SAP implementation strategy in both the U.S. and European service parts markets.

“We knew we didn’t have a technology platform that could support our global vision,” adds Czach. “Though we excel at service parts planning in the United States, our legacy system won’t allow us to do the planning for our Asia Pacific or South American markets, for instance.”

Unique Partnerships

But when Ford began searching for a system that would allow it to effectively manage service parts logistics and become the foundation for its global supply chain future, it came up empty. So the company decided to fill in the blanks.

“We began looking for a partner to help us design a new technology solution for service parts management, and we found Caterpillar Logistics was traveling down the same path,” Thompson says. “Together, we searched for a technology provider that would partner with us to create a new system.”

Ford and Caterpillar Logistics, a Morton, Ill.-based supply chain services and solutions provider, turned to SAP. The German-based technology giant had the manpower and financial resources necessary to invest in developing a new product, and its technology platform offered the global compatibility the two companies were seeking.

For its part, SAP knew that developing such a system would give it a competitive advantage in the complex world of service parts logistics technology.

“The motivation for developing this new solution was to service two great customers— and to be able to offer a service parts management product to the broader market,” explains Stefan Neubig, vice president, customer operations for SAP America.

Ford, Caterpillar Logistics, and SAP— along with Deloitte Consulting, in a systems integrator role— worked together on developing the new SPM solution, which includes two new engines, SPP and Extended Warehouse Management (eWM). The development phase continued for nearly four years before the two companies broke off into their own implementation phases. During the multi-year development process, both Ford and Caterpillar Logistics contributed greatly to SAP’s understanding of the nuances of service parts logistics.

“Although SAP already had warehousing and inventory planning tools in place, the complexities and requirements for service parts were new to us,” Neubig explains. “We relied on Ford and Caterpillar Logistics for that expertise.”

Let the Implementation Begin

Once the team felt it had a viable product, Ford started an 18-month implementation process in its European market, debuting the SPP solution there in mid-2007.

“We agreed to implement the functionality first in Europe because its IT tools for service parts were not as mature as the legacy system operating in the United States,” Thompson explains. “We knew we could reap the benefits faster in Europe.

“Because SPP was a new system and had not been proven at the volumes Ford handles, we made a lot of tweaks to the system’s capabilities during its implementation,” she adds.

Ford partnered with global consulting firm Westernacher for custom development to address these technical issues as it continued to fine-tune functionality and performance. Westernacher also provided key functional resources throughout the SPP and eWM implementations in Europe.

U.S. rollout

In 2009, when the European SPP implementation was finished, Ford began implementing eWM at its warehouse depots in Europe, and simultaneously started the U.S. rollout of SPP. (Later in 2011, the company will begin implementing a third SAP module to handle order processing, marketing, and customer interaction for service parts management in Europe.)

In the United States, Ford took a slightly different implementation approach. It first conducted a mini pilot to test the infrastructure and make sure SAP’s system could talk to Ford’s remaining legacy systems, then began launching SPP in 2010. Because of the U.S. market’s size and scope, and the strength of the U.S. legacy technology systems, Ford decided to implement SPP functionality in two phases.

“Instead of a big-bang U.S. implementation, we began using the new SAP product to forecast and plan our parts. But we continued to back-feed the inventory plan into our legacy system to handle deployment and other downstream processes,” Thompson notes.

Ford is currently able to plan 98 percent of its parts in SAP. Once the company reaches 100 percent, it will begin the second implementation phase, using SPP to manage parts deployment. The company plans to begin piloting this second phase in 2012.

As happens with all large technology projects, Ford faced some major hurdles while developing and implementing the SAP solution. For starters, the company had to commit significant personnel resources to the project.

“This type of technology requires an investment in people,” Thompson explains. “We had to ensure our people can implement this system and maintain it going forward.”

Another challenge that Ford will continue to face is integrating the various pieces of the SAP system with Ford’s existing IT infrastructure— both in the United States and Europe, where implementations are already underway, and in the future as the company deploys SPM across the globe. With the head-spinning number of parts that accompany a global service parts operation, Thompson expects data integrity and synchronization challenges to continue cropping up.

But throughout the project, Ford’s clear vision and executive commitment to overhauling its service parts supply chain has helped steer it through these challenges— as well as the near-death experience the entire auto industry endured during the 2008 recession.

“Because this was such a high-budget project, we fell under scrutiny, especially when cash flow was tight,” Czach says. “But we had the commitment and the knowledge that our global vision was the endgame, and without this system, we couldn’t achieve it.”

Big Benefits

Ford’s hard work and vision is starting to pay off. It has achieved impressive preliminary benefits in Europe, where SPP has been fully implemented for 18 months, and eWM is live at one site in France and partially launched at a depot in England. (See sidebar on page 148.)

Ford reached these benefits faster than expected, but Thompson is quick to caution that the company does not expect similar achievements in the United States because of the capabilities of the existing IT infrastructure and business processes here.

“Benefits in each region will vary based on the baseline they start with,” she explains. “Some tools and strategies that are mature in the United States were not in place when we launched in Europe.

“But, we have hit just the tip of the iceberg there,” she adds. “As the team grows and better understands the system’s capability, the numbers will likely increase.”

better than best

What has Ford gained with the new SAP system in the United States? Though the implementation is ongoing— the back-end launch of SPP is still to come, and eWM will begin rolling out in July 2011 with completion expected in 2013— Ford’s U.S. service parts solution is on its way to being “best-in-class plus,” says Czach. Here is a breakdown of expected benefits:

Forecasting: Though Ford’s legacy system already offered advanced forecasting tools such as automatic model selection, long-term forecast capabilities, and acceleration curves for new model parts, the new SAP system will improve automating these processes.

Inventory planning: The big gain here is the ability to optimize combined safety stock and economic order quantity values. This new capability helps Ford better determine the optimum order quantity for each part in inventory.

“This comes into play with low-volume parts,” Czach notes. “It ends up driving safety stock down on low-volume parts when we buy in large lot sizes.”

Distribution resource planning (DRP): “We have a great DRP system, with future-dated orders and supplier shutdown logic, among other functionalities,” Czach explains. “The one new thing SAP will give us is multiple short-date expediting options.”

In other words, Ford’s current system has only one process for expediting parts, while SAP will allow it to differentiate between suppliers’ preferences on how, when, and how much inventory to expedite— a big gain for supplier relationship management.

Parts deployment: With the addition of SAP’s automatic rounding algorithm, Ford will be able to better marry actual demand with packaging hierarchy logic.

Today, if a depot needs nine pieces, for example, Ford is likely to send a full 10-piece pack; when that depot only needs two pieces, it currently takes a lot of manual work to tell the system to send only those pieces instead of a full pack.

When demand for a part changes, the SAP system automatically rounds the actual quantity deployed up or down to match the parameters Ford sets.

Procurement: SAP supports all the current advantages Ford boasts in its legacy procurement module— such as advanced supplier EDI communication, inbound monitoring, and service fill and loss tools— but gives the company more flexibility around these capabilities.

“When a procurement exception occurs, SAP will let us click on the alerts and drill down to the kind of detail needed to solve the problem,” Czach explains. The SAP system will also automate daily analysis of procurement workflow.

“Overall,” Czach says, “our technology was already best in class on a U.S. platform, but with SAP we will be best in class on a global platform.”

Focus on the Long Term

As Ford continues to roll out SAP’s different modules across the United States, then into additional regions around the world, the company will continue to focus on meeting its long-term goals. Transforming its service parts operation into a lean, mean end-to-end global supply chain machine remains a top priority throughout the company.

“We have a concrete vision for our global strategy,” Czach says. “We evaluate the decisions we make each day to make sure they are moving us closer to that vision, every step of the way.”

o say that Ford Motor Company’s service parts supply chain is complex may be the understatement of the millennium. As one of the world’s largest automakers, Ford boasts $118 billion in revenue and nearly 200,000 employees worldwide. Its U.S. service parts operation alone encompasses some 250,000 part numbers (which equates to about 1.5 million SKUs), approximately 1,500 suppliers, and 4,000 dealerships.